Submission to the Royal Commission into Aged Care Quality and Safety: The Family Home and Aged Care Funding

This brief submission is intended to comment on any proposals to use the ‘family home’ of aged care recipients as a source of funding for the care they receive.

The ‘family home’ is seen by diverse campaigns as an obvious, and in the minds of some campaigners, magic-pudding type of funding source. Their proposals invariably involve some form of home equity release through lending.

Apart from aged care reformers, some campaigners for age pension reform eye the ‘family home’ and demand its inclusion in pension means testing, forcing older Australians to sell up and move or take out a home equity release loan, also known as a reverse mortgage. Then there are local councils and water authorities who want to notch up rates and charges against the pensioner’s family home while cancelling pensioner rebates.

The most elaborate proposal to use home equity release for the family home as a funding source was developed by the Productivity Commission as part of its inquiry Caring for Older Australians.[1] This proposal attracted support from the aged care industry, unions and peak health and para-health bodies. Surprisingly, support was also forthcoming from a number of consumer organisations, who should have known better.

CPSA opposed the Productivity Commission’s proposal on the grounds that it would reduce the housing security of older Australians.

The Productivity’s Commission proposal was eventually not adopted by the Government of the day. No reason was given. However, it is very likely that the financial risk associated with home equity release was what prompted the Government to reject this proposal, which envisaged a home equity release scheme guaranteed by the Government.

It is CPSA’s view that any new proposal involving equity release and the family home will fail for the same reason as the Productivity Commission’s proposal failed to get up: the financial risk associated with becoming the reverse mortgagee, whether it is the Government or the private sector, of a vast slice of Australian residential real estate is too great.

The aim of this submission is therefore not to avert equity release and the family home being used to fund aged care, but to impress upon the Royal Commission into Aged Quality and Safety the need to look for alternative funding sources and methods if the Royal Commission concludes aged care funding must be increased.

It is important to realise that home equity release loans are not portable, but must be repaid when the security property is sold. Effectively, this means that a borrower cannot sell to move to another owner-occupied property, because owner equity in the security property runs down quickly as a result of daily compound interest charges. Equity is therefore unlikely to be sufficient for the purchase of a replacement property and when this happens the borrower is stuck.

Obviously, this is not a good situation to be in. For example, a person in receipt of home care or their partner or dependent living in a double-storey house may develop mobility impairment and may need to move to a single-storey house and they may also need to move to a different location closer to health providers and social supports. In the absence of elaborate housing policy at local, state and territory and federal government level, older Australians need to keep their options open. Encumbering their property with debt closes off those options. It is for this reason CPSA opposes the use of home equity release to fund services for older Australians.

From the lender’s point of view, home equity release mortgages are considered riskier than ordinary mortgages. The current rate for a principal-plus-interest repayable owner-occupier mortgage is between 3 and 3.5 per cent. The rate for investment home loans is between 3.6 and 4.2 per cent. However, home equity release rates are between 6.5 and 7 per cent, while the very modestly capitalised Centrelink’s Pension Loan Scheme, which only provides capped income streams, currently offers a rate of 5.25 per cent.

The appetite among commercial lenders to offer home equity release is also very limited. None of the big four banks writes home equity release loans.

Those home equity loans that are offered, operate on loan-to-valuation ratios that do not exceed 25 per cent, even in the case of very elderly borrowers. This underlines the financial risk to the lender associated with home equity release: a minimum of three-quarters of the value of a security property must be available to pay the interest.

With respect to aged care funding, to calculate a rough, conservative estimate of the order of funding that could be raised through home equity release loans to care recipients, we used the following statistics:

The 2017/18 Report on the Operation of the Aged Care Act 1997 puts the number of operational residential aged care places at 216,215 and the occupancy rate at 90.3 per cent. The Home Care Package (HCP) Data Report for the third quarter of 2018/19 says that 93,331 HCP were operational and that 75,739 people were waiting for an HCP. This means that the combined number of care recipients in residential aged care and in the HCP program would be 364,312 if no HCP waiting list existed.

A total of 847,534 care recipients under the Commonwealth Home Support Program brings the total number of care recipients to 1,211,846.

As part of this calculation, it is also assumed that all care recipients are partnered, so that a single security property would be the source of aged care funding for two care recipients.

The calculation (just over $82 billion) is as follows:

Number of

Care recipients

Partners

Home

Ownership

rate

Median

House

value

Home equity release

loan-to-value rate

Maximum total home equity release loan book

1,211,846 / 2 * 85% * $636,900 * 25% = $82,006,376,224

Note that three times this amount of $82 billion is available to service the debt. That is $246 billion.

Also note that the current home equity release interest rate is 6.5 per cent, roughly double the rate for ordinary mortgages, which is at a record low. Extrapolating this to circumstances in which the ordinary mortgage rate is a historically realistic 7 per cent, the home equity release rate would be 10 per cent or even higher. At this rate $82 billion worth of security properties would enter negative equity territory after roughly ten years. At that point, the Government, having underwritten these loans, has negligible to no recourse to recover any continuing interest charges. This is the largest component of the Government’s financial risk: care recipients might live too long.

Also, with the median house value at $636,900, the total amount for two care recipients (the assumption is that each security property covers two partnered care recipients) available is $160,000, or $80,000 per care recipient. Once that $80,000 has been exhausted, as it will be (an HCP Level 4 costs $50,750 annually) within a short space of time[4], the Government would need to cover care costs not covered by the loan. Obviously, this adds significantly to the Government’s financial risk. In other words, the equity release loan will in the vast majority of cases not cover the term of care required.

With underwriting home equity release, the Government would be on a certain loser, paying not just interest charges over security properties in negative equity, but also paying care costs the home equity release loans were supposed to cover.

Home equity release as a source of aged care funding does not really represent so much as a financial risk as a financial folly.

It easy to see why proponents of home equity release loans underwritten by the Government (or anyone else for that matter) have been told in the past, and will be told in the future, that they are dreaming, to use a popular phrase. CPSA respectfully submits that the Royal Commission should prefer to not be thus addressed.

All this does not mean that the $328 billion dollars identified as part of CPSA’s estimate of the home equity owned by care recipients cannot be put to use to reform and improve aged care in Australia. CPSA attaches its aged care housing policy document Right Housing, Right Aged Care to this submission. This policy document argues the need for housing reform to improve aged care and the need for the full amount, not just one quarter of care recipients’ home equity to be used to achieve that aim.

[4] The 2017-2018 Report of the Operation of the Aged Care Act 1997 puts the average stay in residential aged care at 34.6 months. There is no published information about average stays in CHSP and the HCP program. It is also not known to what extent and for which duration people graduate from CHSP to HCP or residential aged care, or from HCP to residential aged care.